Asia ‘poised to lead’ in a post-crisis world

William Strong has had a successful career in the investment banking industry spanning more than 30 years, two-thirds of that with Morgan Stanley.

But if he could trade places right now with young bankers just starting out in the Asia-Pacific region, he would.

In a recent talk in NUS Business School’s Leadership Dialogue Series the now former co-CEO of Morgan Stanley Asia Pacific said the region had weathered the global financial crisis exceptionally well and he expects it to see phenomenal growth in the coming decades.

“I think this century is going to the the century for Asia-Pacific,” he told an audience of students, faculty and industry professionals. “I think you’re at exactly the right place at precisely the right time.”

strong280Strong laid out his take on the causes of the global financial crisis, the lessons that can be learned from it, and why the Asia-Pacific region does not seem to be doomed to make the same mistakes that were made in western markets that led to the crisis.

In hindsight, the cause of the crisis is easy to pinpoint: the mistaken belief in the United States and Europe that residential real estate prices would continue to go up.

“Everybody was betting on it. Everybody was wrong,” he said. And when the bubble burst, there was an unprecedented number of bankruptcies and defaults.

Financial institutions which had used mortgage-backed securities to finance the home loans saw that market dry up.

That led to massive loan losses at banks and subsequently the collapse of major financial firms, most notoriously Lehman Brothers.

Looking back, he says it is clear financial institutions got away from good management principles – they “doubled down” on real estate, rather than diversifying into other businesses and revenue streams. It comes down to common sense.

“If things look like they’re going sky-high and you just can’t believe it, well, maybe you’re right. Maybe you ought to be doing something else,” he said.

But he acknowledged it can be difficult to recognize the warning signs when the crisis is still building.

foreclosure280The response from regulators was to implement a series of policies and regulatory requirements aimed at improving bank safety and minimizing systemic risk.

While this has resulted in putting financial institutions under closer scrutiny, Strong says ultimately it’s better for the industry and better for investors.

The Asia-Pacific region certainly felt the impact of the crisis and growth did slow, but Strong says at no time did the region as a whole experience a recession.

Furthermore, even though real estate values have increased in many Asian cities, governments are taking steps to cool some of the markets.

He pointed to Hong Kong as an example, where new regulations impose a supplemental tax on those who buy a property and flip it within two years.

Strong said he was also encouraged by the fact that the region does not rely on the same type of financing techniques that were used in the west.

Consequently he said he believes the region is poised for significant growth compared to the rest of the world.

He told the audience that nine of the 15 fastest growing economies in the world are in Asia-Pacific.

In 2012, the region as a whole accounted for 23 percent of the world’s GDP but that’s expected to climb to 46 percent by 2040.

ThinkAloud4At the same time the world’s GDP is expected to grow from $73 trillion to a whopping $376 trillion.

All of this is expected to happen in a mere 28-year time frame, so anyone launching a financial career now could be signing on for a spectacular ride.

It might not necessarily be smooth sailing however, with a number of issues that need to be addressed.

Strong says his top concern is the free movement of goods, services, people and capital across borders. Right now he says there’s too much friction between countries and a plethora of investment rules that could put investors off.

He also says it’s important for investors to have confidence in the rule of law – whether they be domestic or foreign.

“I want to know that I’m going to be treated fairly… there’s going to be transparency, and if somebody unfairly, illegally discriminates against me, or cheats me, I’ve got redress in the courts,” he said.

“If I don’t have that I’m going to invest someplace else.”

Another key issue, Strong said, will be the demand for capital.

Right now there is no pan-Asian bond market. Dealing with various currencies and regulatory agencies could be another impediment to growth.

Still he says that the Asia-Pacific weathered the financial crisis well and has proven to be resilient. The region, he concludes, is in very good shape.

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